corporate finance

Liquidity Ratio

This ratio indicates how rapidly a corporation can turn its present assets into cash in order to pay down its liabilities on time. Liquidity and short-term solvency are frequently used simultaneously.

Current Ratio

The current ratio compares a company’s capacity to pay down current obligations (those due within one year) with its total current assets, which include cash, accounts receivable, and inventory. The better the company’s liquidity condition, the higher the ratio:

Current Ratio = Current Liabilities / Current Assets

Quick Ratio

The quick ratio, which removes inventory from current assets, assesses a company’s ability to satisfy short-term obligations with its most liquid assets.

Quick ratio= (C+MS+AR) / CL

C – cash & cash equivalents
MS – marketable securities
AR – accounts receivable
CL – current liabilities

Another way is: Quick ratio = (Current assets – Inventory – Prepaid expenses) / Current liabilities

Efficiency ratio

The efficiency ratio is commonly used to assess how well a corporation manages its assets and liabilities inside the organization.

Asset Turnover Ratio

The asset turnover ratio compares the value of a company’s assets to the value of its sales or revenues. The asset turnover ratio is an indicator of a company’s ability to earn revenue from its assets.

Asset Turnover = Total Sales / (Beginning Assets + Ending Assets) / 2

Total Sales – Annual sales total
Beginning Assets – Assets at start of year
Ending Assets – Assets at end of year

Inventory Turnover Ratio

The pace at which a corporation replaces inventory owing to sales in a particular period is known as inventory turnover. Inventory turnover calculations assist companies in making better pricing, production, marketing, and purchasing choices.

Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory

Average Collection Period

In terms of accounts receivable (AR), the word average collection period refers to the time it takes for a firm to obtain payments due by its customers. The average collection period is used by businesses to ensure that they have enough cash on hand to satisfy their financial obligations.

Average collection period = (AR * Days) / Credit sales
AR – average amount of accounts receivable
Credit sales – total amount of net credit sales in the period

Corporate Finance is about how companies make decisions about what projects to pursue and how to value those projects.

Ratio Analysis

Ratio Analysis is taking two numbers from financial statements and dividing one by the other. What we are doing is taking two pieces of accounting data, put one over the other, and this forms a ratio. We are taking two pieces of data and forming a performance metric. Ratios are usually presented as a percentage or a number depending on whether the usual case is bigger or less than one.

Time value of money

Time is money, literally. If there is a prospect of receiving a certain sum then the sooner you receive it the more it is worth. Interest rates describe this relationship between present value and future value.

Discounting Cash Flows

A company is essentially an entity that generates cash flows each year into the future. The trick is estimating those future cash flows and how much they might grow or shrink and what the risks are to realizing (receiving) them.

Present value and Future value

$100 invested for one year, earning 5% interest, will be worth $105 after one year, therefore $100 paid now and $105 paid exactly one year later both have the same value to a recipient who expects 5% return. That is $100 invested for one year at 5% interest has a future value of $105.

Net Present Value

The way we look at decisions about whether to fund a project or calculate the value of an asset is to turn that stream of future dollars into today’s dollars. Then we compare that sum of present value, we don’t do the deal, if t is less, it is considered a good deal.

Tag: corporate finance

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